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    Yacht Lessons

    Apr 11 • Government, Thinking Economically • 266 Views

    When we think about taxes, we should look at yachts. In 1990, because of a new luxury tax, anyone who purchased a yacht paid 10% more. The result? People stopped buying domestically made yachts. Yacht makers went out of business and the government never collected the revenue it sought. After the tax was repealed in 1993, sales increased.

    Fast forward to 2010. On April 6th, the Florida house capped the tax on yachts at $18,000. Consequently, people buying boats sold for $300,000 or more got a tax cut. The result? Supporters claim sales will increase because boat buyers will no longer go elsewhere to avoid the tax.  In response, opponents say this tax cut will not help most Floridians, especially the unemployed and those with declining home values.

    The debate about a tax on luxury items returns us to taxing dilemmas. Government’s search for more revenue is complex.  The most politically attractive solutions might not always become fiscally fruitful.

    The Economic Lesson

    In addition to progressive income taxes and luxury taxes, Congress can look at other tax approaches. They can consider higher sales or estate taxes, a value added tax on manufacturing firms, and a flat tax for everyone. Whichever they select, the incentives they create will shape the response and the revenue they generate. 

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    Taxing Decisions

    Apr 10 • Government • 250 Views

    Some people believe that government spends more when it has an affluent population to pay for it.  In a recent NY Times column, David Leonhardt presents a slightly different perspective. Instead, he says that because we are a more affluent society, we want government to spend more. As he expresses it, “A tax increase is…a result of a society becoming richer.” As economic growth accelerates, so too does what people want from government.  We want additional services; we want a transport infrastructure; we want medical care.  

    So far, how have we funded these wants?

    • On the revenue side, federal taxes have totaled close to 18% of GDP.
    • The individual income tax is our largest source of revenue.
    • The second largest source is social insurance taxes (social security and Medicare) while corporate taxes are a distant third. 
    • During the 1950s and 1960s, the top marginal tax rate was actually 91%.

    Where do we go from here? More tomorrow…

    The Economic Lesson

    There are three basic tax approaches: 1) Progressive taxation: the affluent pay a higher percent of their income than those who have less. 2) Regressive taxation: those who have less pay a higher percent of their income than those who have more. 3) Proportional taxation: everyone pays the same percent of their income. Our individual income tax system is progressive, sales taxes are regressive, and the Medicare tax is an example of a proportional tax.

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  • Crisis Autopsy

    Apr 9 • Economic History, Financial Markets, Regulation • 249 Views

    In an October NY Times op-ed, Calvin Trillin describes a (hypothetical) conversation in a midtown bar about the financial crisis. “The financial system nearly collapsed because smart guys had started working on Wall Street.” By contrast, decades ago, a top student became a federal judge or a professor. Meanwhile, the bottom third went to Wall Street. More recently though, “Smart guys started going to Wall Street.” and invented derivatives and credit default swaps.  “But who was running the firms they worked for? Our guys! The lower third of the class. Guys who didn’t have the foggiest notion of what a credit default swap was…!” 

    I only remembered Trillin’s column because of yesterday’s Financial Crisis Inquiry Commission (FCIC) testimony from Chuck Prince, former head of Citigroup and Bob Rubin, Citigroup “senior counselor” and former Secretary of the Treasury. 

    Please do read Trillin’s column and then listen to yesterday’s testimony. Your opinion? Also, check this baseline scenario comment on Alan Greenspan’s testimony.

    The Economic Lesson

    The FCIC is being compared to the Pecora Commission. Between 1932 and 1934, the Pecora Commission investigated “stock exchange practices and their effect on American commerce, the national banking system, and the government securities market. They also addressed issues of tax evasion and avoidance.” Their impact is reflected by the content of the Banking Act of 1933 (Glass-Steagall), the Securities Act of 1933, and the Securities Exchange Act of 1934. A St. Louis Fed paper has the documents. 


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    It’s All About Extras

    Apr 8 • Businesses, Thinking Economically • 273 Views

    Whenever you consider doing something extra, you are thinking at the margin.

    • When airlines decided to charge travelers for more than one bag, they were thinking at the margin.
    • Still thinking at the margin, they realized they could generate considerable extra revenue by getting paid for extra baggage.
    • Also thinking at the margin, some travelers stopped taking an extra bag.
    • Still though, airlines’ extra (marginal) revenue increased by $1.5.billion.
    • Then, because planes had less extra baggage, extra fuel was no longer necessary.
    • Less fuel meant extra profits and larger profit margins.
    • For baggage handling injuries and bag losses, there were fewer extras.
    • Fewer bags meant extra room for cargo (which is more lucrative for the airlines).
    • However, flight attendants are experiencing extra injuries because passengers are jamming bigger bags into the overhead racks.
    • And finally, airlines have always thought about extras because one extra passenger on a plane typically costs them the price of an extra meal.  

    The Economic Lesson

    Whenever anyone considers the cost and benefit of something extra, that person is thinking at the margin. The margin is an imaginary line that separates the current amount you are doing from the extras you might be contemplating. As you can see, airlines have been doing a lot of thinking at the margin.

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    Frugal Fatigue and Yuan Updates

    Apr 7 • Businesses, Households, International Trade and Finance, Macroeconomic Measurement • 292 Views

    Re a March 21 post about frugal fatigue…

    For a fifth straight month, consumer spending is up, meaning perhaps that we are headed for a “V” recovery?  

    Data from the most recent Bureau of Labor Statistics (BLS) report indicates that internet spending on computer information services is soaring while purchases of newspapers and magazines are plummeting. Predictably, between 1999 and 2008, with the largest decline, the “under-25 population” spent 58% less on newspapers and magazines; those 65 and over spent the most on real print media but still decreased their spending by 22%. The report includes a great graph.


    Re a March 27 post about the yuan…

    Economist Don Boudreaux responds to Planet Money’s description of Chinese currency manipulation saying instead that their policy can also have a positive impact on trade by making the value of the yuan more predictable.

    Hoping to settle differences during the next G-20 meeting, Treasury Secretary Geithner will postpone his report to the Congress on Chinese currency policies.


    The Economic Lesson

    Characterized as structural change, diminished demand for magazines and newspapers is an example of an industry contracting as demand shifts to new technology.  

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